January celebrations.

Michael Gray to speak about coming retirement plan changes.

Michael Gray will speak for the Santa Clara County Estate Planning Council on Monday, January 13, 2020 at David's Restaurant in Santa Clara, California. The subject is the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). This legislation was included in the domestic spending bill, H.R. 1865, Further Consolidated Appropriations Act, 2020, enacted on December 20, 2019, and is the most significant retirement account legislation since the Pension Protection Act of 2006. A significant provision is the repeal of "stretch out" payments for many inherited retirement accounts, including 401(k)s and IRAs, rendering many Conduit Trusts obsolete. Registration is at 5:30 p.m. and dinner starts at 6:15 p.m. Here is a link for details and registration. https://www.sccepc.org/events/event/18139

Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2020. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.

Tax preparation materials will soon be on the way.

Koehler & Associates is in the process of mailing instructions for sending their 2019 tax return preparation instructions. If you haven't received instructions by January 20 or you would otherwise like to receive instructions, call Thi Nguyen at 408-286-7400, extension 206.

Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2019 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Ms. Thi Nguyen, CPA at 408-286-7400, extension 206.

Estates and trusts should plan distributions.

The maximum 37% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. For 2019, they apply when the undistributed estate or trust income exceeds $12,750. If possible, the income of the estate or trust should be distributed to beneficiaries before the year-end, since the threshold for these taxes is much higher for individuals. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is also available to treat distributions made during the first 65 days of the following year (for example, January 31, 2020) as distributed for a taxable year (for example 2019).
In most cases, capital gains don't qualify for the distribution deduction. See your tax advisor.
The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) to avoid unpleasant surprises.

Remember to take a physical inventory as of January 1.

W-2s, 1099s and DE 542 reminder.

Remember that most 2019 annual information returns, such as W-2s and 1099s, should be issued to payees and sent to the tax authorities by January 31, including electronically filed forms. (The new filing date applies to Form 1099-MISC for services.)

Amounts paid using a credit card should not be included on Form 1099. Those amounts are being reported by the merchant companies.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that claim their real estate operations are a trade or business (including for the 20% federal tax deduction for trade or business income) should prepare them anyway. See your tax advisor for details.

Standard mileage rate for 2020.

The standard business mileage rate for 2020 is 57¢ per mile, down from 58¢ per mile for 2019. The medical mileage rate is 17¢ per mile, down from 20¢ per mile for 2019. The mileage rate for moving is also 17¢ per mile for 2020, down from 20¢ per mile for 2019 and now only applies for military personnel, because the deduction has been repealed for everyone else starting 2018. The charitable mileage rate is 14¢ per mile, unchanged.

I expect more taxpayers will be electing to claim bonus depreciation or the expense election for their business vehicles purchased during 2019. The standard mileage rate will NOT apply for those vehicles.

California has its own withholding form, Form DE-4. The withholding is computed differently on the California form, and employees should prepare it separately. Here is a link for your reference. https://edd.ca.gov/pdf_pub_ctr/de4.pdf

Interest rates for tax overpayments and underpayments are increasing.

The IRS has announced that interest rates for tax overpayments and underpayments for the calendar quarter beginning January 1, 2020 will be unchanged from the rates for the fourth quarter of 2019.

For noncorporate taxpayers, the rate for both underpayments and overpayments will be 5%.

For corporations, the overpayment rate will be 4% for overpayments up to $10,000, and 2.5% for overpayments exceeding $10,000. The underpayment rate will be 5% for most corporations, and 7% for large corporations.

Please be diligent about making estimated tax payments and payments with tax returns and extensions to avoid these penalties.

California gives a seven-month filing extension to C corporations.

The California Franchise Tax Board has announced that it will allow an automatic seven-month extension to all C corporations in good standing to file their Forms 100, effective for taxable years ending on or after January 1, 2019.

This means the extended due dates for 2019 calendar-year tax returns for C corporations will be November 16, 2019.

The extended due date for S corporations remains at six months, so the extended due date for 2019 calendar-year tax returns for S corporations will remain September 15, 2020.

Remember the IRS doesn't allow extensions for C corporations or S corporations without filing a form, and might have different filing dates.

California has new rules for nonresident withholding for owners of passthrough entities.

California has created new Form 592-PTE, Pass-Through Entity Annual Withholding Return, for partnerships, LLCs taxed as partnerships or S corporations, S corporations, and trusts or estates that must withhold tax or passthrough withholding credits on California-source income.

Form 592-PTE must be filed by domestic passthrough entities, including nonresident entities, with California-source income by January 31 of the year following the year the withholding was required to be paid to the Franchise Tax Board.

Withholding payments should be paid quarterly together with Form 592-Q, Payment Voucher for Pass-Through Entity Withholding if payments are made by check or money order.

Form 592-B, Resident and Nonresident Withholding Tax Statement, should be sent to payees by January 31.

Note that Form 592-PTE changes passthrough entities from quarterly reporting to annual reporting for payments to partners, members, shareholders or beneficiaries.

California begins involuntary administrative dissolution program.

AB 2503, enacted during 2018, authorized the Franchise Tax Board to forgive $800 minimum or annual taxes and related penalties and interest for California LLCs and corporations that were formed but never launched or that went out of business and never dissolved.

The legislation authorizes a voluntary dissolution program that taxpayers can apply for and an involuntary program initiated by the Franchise Tax Board.

The voluntary program became operational on January 1, 2019.

The Franchise Tax Board has announced it will launch the involuntary dissolution program during January 2020.

The Franchise Tax Board will issue notices to California LLCs and corporations that have been suspended by the Franchise Tax Board for at least 60 consecutive months and have no outstanding liabilities to the Franchise Tax Board for taxes other than the minimum or annual tax.

'Tis the season to exercise ISOs?

Since stock received from exercising an incentive stock option has to meet two holding period tests (more than two years after grant and more than one year after exercise) to avoid having the excess of the fair market value over the option price taxed as ordinary income, exercising early in the year can be advantageous when you decide to hold the stock after exercise. The reason is you have the alternative of selling the stock before the end of the year of exercise and possibly avoiding the alternative minimum tax if the value of the stock drops after exercise. I call this tax strategy the "escape hatch."

If the company's stock isn't publicly traded and you can't sell the shares, this strategy won't work.

Be careful about blackouts. I have had some individuals call me who wanted to use the escape hatch during December, only to discover they were prohibited from selling their shares because they were subject to an employee blackout. Sometimes blackouts can happen unexpectedly, like when an employer becomes a party to a lawsuit. There's no magic solution in these cases - you could be stuck with a significant tax liability.

For many people, the exercise and immediate sale of the shares is the most comfortable alternative, even if the tax bill is higher.

Also remember the wash sale rules can spoil an "escape hatch" transaction. You can't repurchase the shares or even receive an employee stock option or buy a put option during the period starting 30 days before the sale to 30 days after the sale.

Another advantage of an exercise early in the year is to be able to meet the holding period requirements and sell the shares before the tax is due on April 15. But check the estimated tax payment requirements to avoid penalties for late estimated tax payments. (The alternative minimum tax liability can also be payable as an estimated tax liability.)

President Trump signed H.R. 1865, Further Consolidated Appropriations Act, 2020 on December 20, 2019. The Act includes several important tax provisions, some of which involve tax benefits for which amended income tax returns should be prepared for 2018.

IRS issues final regulations for Qualified Opportunity Zones.

The IRS has issued final regulations for Qualified Opportunity Zones. These investments provide an opportunity to defer income tax on capital gains and to avoid income taxes on future appreciation. The final regulations modify and finalize proposed regulations issued in October 2018 and May 2019. There are important changes in the final regulations and the details are beyond the scope of this newsletter. If you are involved with a Qualified Opportunity Zone, please consult with your tax advisor.

The IRS has posted a series of frequently asked questions describing changes made by recently issued final regulations about Qualified Opportunity Zones. Here is a link to FAQs on Qualified Opportunity Zones on the IRS web site. https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions. See your tax advisor for details.

No 20% Qualified Business Income Deduction on a substitute return.

The IRS can prepare a substitute return based on information it receives when a taxpayer doesn't file a federal tax return. The IRS has announced it won't include a 20% Qualified Business Income Deduction on a substitute return that it prepares. Please be conscientious and file a timely income tax return.

(SBSE-04-1219-0054: Guidance for the qualified business income deduction on a substitute for a return.)

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Financial Insider Weekly past episodes

After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Back episodes available at https://www.youtube.com/user/financialinsiderweek.

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P.S.

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Southern French Restaurant at 23 Ross Common, Ross, California,
about 15 minutes north of the Golden Gate Bridge. The name of the
restaurant is Marché Aux Fleurs and their website address is
marcheauxfleursrestaurant.com. For the best meal of your life,
call 415-925-9200 for a reservation and give them a try! For
directions, visit our website at
www.taxtrimmers.com/directions.shtml.